The Commerce Department recently released its annual report on worker compensation by industry. In particular, the report compared the average compensation for federal civilian (non-military) workers versus those employed in the private sector. We’ve long known that the average federal worker makes more than the average private industry worker.

The new report was a shocker as it revealed that the average federal worker made more than twice that of the average private sector worker in 2009 - $123,000 versus $61,000!

There are lots of useful data in this latest report that I will slice and dice for you as we go along. Suffice it to say for now that federal government workers have a sweet deal, and that explains why they rarely quit their jobs. I think you’ll find this discussion interesting (or maybe blood-boiling for some of you).

Following that discussion, we’ll take a look at the latest economic reports, one of which virtually assures that the government will have to revise down its latest estimate of 2Q GDP. The Commerce Department reported last week that US imports soared far above expectations in June, and imports are a drag on GDP growth. Thus, most forecasters now believe that 2Q GDP will be revised down to only 1%-1.5% (annual rate) on August 27 when the next estimate is due out.

Finally, I will share with you the results of our recent Client Survey. We have almost a thousand investment clients scattered across almost all 50 states. Every other year or so, we send a detailed survey questionnaire to our clients just to get a feel for their thinking on a variety of topics. The survey is anonymous so that clients can be as candid as possible. You may see yourself in some of the responses.

** Note that this issue will print longer than usual as we have a lot of charts this week.

Federal Employee vs. Private Sector Compensation

The Commerce Department’s Bureau of Economic Analysis recently released its annual report on worker compensation by industry. Most striking among the new data is the comparison of what federal employees make versus their counterparts in the private sector. It is no secret that federal civilian workers make considerably more on average than those in the private sector.

The recent Bureau of Economic Analysis data includes not only base salary levels for government workers and those in the private sector, but also the total compensation these workers receive on average when “benefits” are added in – such as retirement plans, health insurance, dental care, eye care, etc. The disparity among government workers versus those in the private sector is staggering. How staggering? When wages and benefits are included,

the average federal civilian employee made $123,049 versus only $61,051 for the average private industry employee in 2009, according to the government’s own Bureau of Economic Analysis report at the end of July!

For the second year in a row, the average federal civilian worker made more than double what the average private sector worker made in 2009. The disparity in federal versus private compensation in 2009 was the largest on record. Obviously, this report has received a lot of attention among economists and financial writers over the last week or so.

But as usual, you’ve probably heard little or nothing about this in the mainstream media.Given that, I have taken the liberty to reproduce several charts from the Cato Institute, a libertarian think tank in Washington, that illustrate the vast gap between federal versus private sector wages and benefits.

Keep in mind that the charts that follow were produced explicitly from the latest Commerce Department/Bureau of Economic Analysis report released earlier this month.

We begin by looking at average wages – not including benefits – over the last decade. We see in the chart below that in 2009, the average wage for the apprx. 1.95 million federal civilian workers was $81,258, which compared to an average of $50,462 for the nation’s apprx. 101 million private sector workers (measured in full-time equivalents).

Notice that the wage gap – again without benefits included – between federal and private workers in 2000 was 32.6%, meaning that the average federal employee made 32.6% more than their average counterpart in private industry. By 2009, that gap had swelled to 61%.

Notice also that the rate of growth in wages in the private sector flattened out in 2008 and 2009, thanks largely due to the recession, while the rate of pay growth for federal civilian workers continued to rise each year.

The next chart is even more eye-popping! The federal pay advantage is even more remarkable when worker benefits are included. In 2009, federal worker compensation (wages and benefits) averaged a whopping $123,049, which was more than double the private sector average of $61,051.

Of the $123,049 earned by the average federal civilian worker, $41,791 was in benefits. Compare that to the average private industry worker who made $61,051, of which only $10,589 was in benefits. Federal workers get almost four times the benefits compared to the private sector, and two-and-a-half times that of state and local government employees!

The disparity between average federal and private employee compensation has risen dramatically over the last decade, from 66% in 2000 to over 100% in 2009. Defenders of generous federal employee compensation point to the higher levels of education in the federal workforce versus the private sector. But does anyone believe that the average government worker is more than twice as educated as the average private industry worker? Many of the smartest minds on the planet are in the private sector.

The next chart shows that federal employees also enjoy much greater job security than those in the private sector. In 2009, a private sector employee was over three times more likely to be laid off or fired than a federal employee. Notice also that in 2008 – during the worst of the credit crisis and the recession, the federal layoff and discharge rate plunged to around 4% while the private industry rate continued to climb, and unemployment rose to near 10%.

With the average federal worker making more than double their counterpart in the private sector, you probably wouldn’t be surprised to learn that relatively few federal workers ever quit their jobs. The next chart shows that in 2009, private sector employees quit their jobs at a rate that was more than eight times higher than federal employees.

This obviously indicates that federal employees recognize that the generous combination of wages, benefits, and job security is hard to match in the private sector, so they stay put. And how can you blame them?

To sum it all up, federal salaries have grown 33% faster than inflation over the decade. Their pay and benefits averaged $123,049 in 2009, up 61% since 2000. Private workers averaged $61,051, up just 8.8% during the same time period. Federal workers have been awarded larger average pay and benefit increases than private employees for the last nine years in a row.

FYI, the number of federal civilian employees will top two million this year. It is also worth noting that, in light of our trillion-dollar budget deficits, the government is borrowing the money to pay this hugely outsized compensation. Any private business that did this would soon have to file for bankruptcy.

2Q GDP Expected to be Revised Even Lower

Last week I noted that the Commerce Department’s advance estimate for 2Q GDP was only 2.4% (annual rate). I also commented that the 2.4% number was considerably weaker than expected. Now there is reason to believe that the GDP number will be further reduced near the end of August when the government releases its next estimate.

After my E-Letter went out last week, the Commerce Dept. reported that US imports in June soared 18.8% to $49.9 billion, the highest since October 2008. That was much worse than Wall Street predicted – and what the Commerce Department estimated in the recent 2Q GDP report.

In figuring the GDP reports, the Commerce Dept. counts imports as a net negative to growth, whereas exports are a net positive. Thus, the much larger than expected imports in June will almost certainly cause the government to revise downward the previous estimate of 2.4% growth in the 2Q.

The new report on imports, along with recent inventory data, have most forecasters expecting the Commerce Dept. to revise down the 2Q GDP estimate from the already sluggish 2.4% annual rate to about 1%-1.5%. Not good. This may explain in part why the stock market took a nosedive last week.

In another report last week, the Labor Department reported that worker productivity fell by 0.9% (annual rate) in the 2Q, which was considerably worse than the pre-report consensus. It was the first quarterly drop in productivity in more than a year.

Worker productivity rose by large amounts during the recession as companies slashed their payrolls and pushed unemployment to the highest levels in more than two decades. Productivity for all of 2009 rose 3.5%, the best showing in six years and a reflection of companies’ ability to produce more with fewer workers.

Some economists suggested that the drop in productivity in the 2Q means that companies will need to hire more workers in the remaining months of this year. That remains to be seen. Of course, the drop in productivity could simply be due to the slowdown in the economy in the last several months.

Last week’s “initial claims” report certainly didn’t support the idea that companies will be hiring more new workers soon because productivity was down in the 2Q. The number of people filing for first-time unemployment benefits rose more than expected during the first week of August to 484,000 which was greater than the 482,000 in the last week of July. These were among the highest readings of the year and do not suggest that companies, in general, are looking to hire new workers.

All of this data confirms that the economic recovery is running out of steam. In fact, more and more economists and forecasters are actually mentioning the “D” word – deflation. I’ll weigh in on the inflation/deflation arguments sometime just ahead.

Results From Our Recent Client Survey

At my company, we have almost a thousand investment clients spread throughout almost all of the 50 states. Every other year or so, we send a detailed survey questionnaire to our clients just to get a feel for their thinking on a variety of topics. The survey is anonymous so that clients can be as candid as possible.

We do this, for one reason, because we have never met most of our clients in person. For many years, most of our new clients have come to us by way of referral and from these weekly E-Letters. Perhaps most important, the surveys help me in writing my newsletters and E-Letters, since one question asks clients which topics are the most interesting to them (more on this below). Anyway, I thought it might be interesting to share with you some of the latest survey results.

For example, the large majority of our clients are males over the age of 50, although we do have our share of females. Over half of our clients are either retired or semi-retired, and about 80% are high net worth individuals.

As for investing, the large majority of our clients prefer the actively managed investment programs that Halbert Wealth Management (“HWM”) offers – most of which have the ability to get out of the stock and bond markets during bear markets – over the traditional “buy-and-hold” strategies that Wall Street has preached for years. Only 15% of our clients have over half of their investment portfolio in buy-and-hold strategies; the rest have less than 50% in buy-and-hold strategies. Some 23% said they have no buy-and-hold investments in their portfolios. The majority of clients rate themselves as “Moderate” in terms of their goals and risk tolerance, as opposed to Conservative or Aggressive.

We asked about their outlook for the economy. Less than 10% think the current economic recovery will continue. Almost 78% believe that another financial crisis is coming in the next few years.

We also asked several questions about my weekly E-Letters. We asked for opinions as to the length of the letter: too long, too short, or just right? Over 76% answered just right. We asked them to rank the various topics I write about. Not surprisingly, the most popular topics are (in order):

Economy & Markets

Politics & Geopolitics

Investment & Financial Planning

Featured Money Managers

Finally, we asked their political persuasion. Almost 74% of respondents consider themselves to be “Conservative”;almost 13%identified themselves as “Moderate”; and only 2.8% said they are “Liberal” Go figure! [Note: some chose not to answer this question.]

As I said at the beginning, we have clients in almost all 50 states, and I have never met most of them. In this electronic/digital age, it is not necessary to have your Investment Advisor located in the town where you live. What you do want is an Advisor that continually searches for professional money managers that can help reduce your risks of being in the market.

HWM does that by finding and recommending professional money managers that have time-tested systems, most of which have the potential to exit the stock and bond markets during bear markets to limit risks.

Most importantly, if you see yourself in the discussion of the survey results above but haven’t taken action to investigate the active management strategies we recommend, I welcome you to do so. If our clients are right and another major crisis is lurking around the corner, this may be the best time for you to consider HWM’s active management strategies for your own portfolio.

Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.